Bonds: What They Are and Why Portfolios Hold Them

Equities get all the attention, but the other half of the classic portfolio is bonds — and most investors hold them (inside pension default funds) without ever being told what they are. Here is bonds in plain English, including the 2022 episode that confused everyone.

What a bond is

A bond is a loan, sliced into tradeable pieces. Governments and companies borrow; you lend; in exchange you receive fixed interest (the "coupon") on schedule and your money back at maturity. UK government bonds are gilts; US ones Treasuries; company bonds are corporate bonds, paying more because companies default more often than G7 governments. Because payments are contractual rather than dependent on profits, bonds are less volatile than shares — the traditional ballast that makes a portfolio survivable.

The one mechanism you must understand

Bond prices move opposite to interest rates. If you hold a bond paying 2% and new bonds pay 5%, nobody will buy yours except at a discount — its price falls until the yield matches. Rates up, existing bond prices down; rates down, bond prices up. Sensitivity scales with time to maturity ("duration"): long-dated bonds are far more rate-sensitive than short-dated ones. This is not a footnote — it is what happened in 2022, when the fastest rate-hiking cycle in decades hit long-duration bond funds for losses of 20–40%. People who believed bonds were "the safe bit" learned they are safe from equity risk, not from rate risk. Held to maturity a gilt repays in full; a bond fund holds a rolling ladder and marks prices daily, so it recovers through higher yields over roughly its duration, rather than by "maturing".

What bonds do in a portfolio

• Dampen the ride: a 60/40 equity/bond mix historically falls far less in equity crashes than 100% equities — the difference between a fall you hold through and one you sell into (see crash behaviour).
• Provide dry powder: rebalancing from bonds into fallen equities is how a portfolio buys low mechanically.
• Fund near-term spending: as goals approach, shifting toward short-dated bonds and cash protects money you will actually need — the glide path every target-date pension fund follows.

How much, and which ones

The old heuristic — bond percentage roughly matching your age, adjusted for temperament — still frames it: a 30-year-old with decades ahead needs few or none (young money's enemy is inflation, not volatility); a 60-year-old approaching drawdown wants meaningful ballast. Practical implementation for most people is a single diversified bond fund — a global aggregate fund hedged to sterling, or a gilts fund — with duration on the shorter side if rate risk worries you; or simply a LifeStrategy/target-date style fund that bundles the equity/bond mix and allocation decisions in one line. What to skip: individual corporate bonds (single-company risk without equity upside) and anything marketed as a "high-yield bond opportunity" — in bonds, high yield is the polite term for credit risk.

This is general education, not personalised financial advice. Investing involves risk, including the risk of losing money, and past performance is not a guide to future returns. Nothing here recommends any specific investment — for anything genuinely complex or high-stakes, speak to a regulated financial adviser.